Unexpectedly, inflation has been a benefit to the industry, while the “threat of recession” has had no discernable impact. Inflation impacts the lodging industry in terms of both top line revenues and expenses. Our revenues have been driven to record levels by record high average daily rates, which were up over 40% in the second quarter compared to 2019. Meanwhile, even though expenses were higher as well, overall Gross Operating Profit was up over 40%. In terms of the “threat of recession” … economic cycles pull back into recession periodically and regularly. But each recession is different and what is far more important is the cause of the recession. A slight pullback in GDP, which is what we are now seeing, is accompanied by low unemployment and record high ADR inflation due to pent up demand and other emerging travel trends. This means that this “threat of recession” has had no detrimental impact on the industry.

Be prepared for the worst! We had a very conservative leverage strategy going into the pandemic, but it was not one that anticipated a largely government mandated shut down of 90% of our hotels and the resulting release of 90% of our employees. As a result, we were forced to seek forbearance from our lenders and raise common equity to build liquidity to get through that difficult period. As a result, we are now targeting a much lower absolute level of leverage, which we plan to maintain going forward. Pre-pandemic, we utilized 45% Net Debt to Gross Assets, including Commercial Mortgage-Backed Securities debt. Going forward, we will utilize 35% Net Debt to Gross Assets and severely restrict our reliance on inflexible CMBS debt.

Guest expectations have increased and will continue to be very high due to record high ADR's and increased leisure segment mix. Many of our resort hotels have high repeat customers who recognize they are now paying more than they have in the past and this comes with increased expectations. That said, we are positioned well for this as our hotels are some of the absolute best in the world and are accustomed to delivering exceptional service and exceeding guest expectations. Increasingly, customers want more experiential activities and dining while on property. To meet these needs, we are building out new amenities and services, including adding kids’ pools and splash pads, Top Golf simulator suites, increased and enhanced cabana offerings, expanded beach activities, and targeted restaurant re-concepting, for example.

We've certainly been impacted and are operating at about 90% of pre-pandemic staffing levels. That said, we are fortunate in that we have not had to take any rooms out of service because of this. We primarily feel it in our restaurants and have had to flex hours based on available staffing.

That said, the labor shortage has improved recently, and we've had more success in hiring in late Q2/Q3 than last year. And while earlier this year our housekeeping departments experienced hiring challenges, we were able to navigate this by utilizing third party or contract labor to cover shifts where necessary.

Going forward, to overcome this problem, we need to be more flexible in our labor models. Line level employees want flexibility in their schedules and to be paid quickly. We have encouraged some of our larger brand partners to adopt daily pay as well as tech partnerships to allow housekeepers to pick up shifts conveniently.

As an industry, transaction volumes are up compared to last year and pre-pandemic levels. That said, the recent dislocation in the hotel debt capital market has resulted in higher spreads and lower advance rates, making it more challenging for leveraged buyers to transact. As a result, we have seen a high proportion of properties offered by brokers getting pulled from the market as seller’s expectations are not matched by buyer’s interest levels.

REIT stock prices have been slow to track the recovery in operating fundamentals, resulting in chronic undervaluation. I would expect this to correct as investor confidence builds in the recovery.

Consolidation in the REIT sector is infrequent. That said, the few mergers that we have seen over the last five years have been regarded as unsuccessful in generating shareholder value. As a result, I don’t expect there to be much activity.

Braemar will be an acquiror. We don’t have any current plans to sell any assets and like the positioning of our portfolio in the luxury segment, with equal exposure to resort and urban properties. Our resorts are delivering all-time high performance, while our urban properties are serving as our growth engine as the recovery related to the return of the business transient and group segments continues.

Looking forward, our investment focus is extremely specific: luxury hotels. They can be either resort or urban properties, and we have recently been able to find value in each. It all depends on the circumstances related to the seller. The luxury segment has delivered the highest RevPAR growth of any chain-scale segment for the last 30 years, which has informed our long-term investment strategy.

We see a lot less reliance on leveraged acquisitions. This means that unleveraged balance sheet buyers, such as REITs, should have a comparative advantage relative to private equity funds and others. Furthermore, unleveraged buyers don’t need to have a financing contingency in their offers, providing far more certainty to sellers in these uncertain times in the hotel debt capital markets.

With a smaller buyer pool, this should also mean that you will see less “opportunistic” sellers seeking the highest possible prices and more motivated buyers that need to transact. This could lead to a higher success rate on deals offered going forward and potentially more attractive pricing metrics for buyers.

Recent increases in the cost of both insurance and property taxes have certainly provided headwinds to Net Operating Income growth. Opportunistic municipalities have continued to push up property taxes to the detriment of hotel owners. In particular, the reassessment and growth of property taxes is something that brokers and sellers seem to ignore when offering assets to the market, resulting in divergent views on values between buyers and sellers.

Additionally, the cost of construction, which has recently inflated dramatically (viewed as up over 20% in the past year), can also be overlooked. When estimating the costs of upbranding, repositioning and conversion, this is an extremely crucial factor to properly forecast.

In recent years, with the flexibility in work schedules and the advent of “revenge travel” encouraged by government mandated stay at home orders, resorts have outperformed considerably. They have become the “belle of the ball,” while their urban brethren have seen a sluggish recovery tied to the rebuilding of the conference and meeting calendar, including large citywide conventions. Our belief is that urban centers will return to previous activity levels and these urban hotels will ultimately outperform the resort segment. However, transaction activity has been more focused on resorts than urban properties (particularly in the luxury segment), which appears to be driven by short term performance trends rather than long term value potential.